PGP-21: Optimizing liquidity management for $PAL via Arrakis Genesis House

Author
@barbarossa_Arrakis

Summary
Paladin participates in Arrakis Finance Genesis House and deploys Arrakis PALM for PAL/agEUR pool on Uniswap V3.

Introduction to Arrakis Finance and Arrakis PALM
Arrakis Finance is a liquidity management protocol that helps project tokens bootstrap deep and sustainable liquidity in the most cost-effective way.

Since launch, Arrakis has achieved

  • ~ $1.3 billion in TVL across Ethereum, Optimism and Polygon
  • Over 25% Uniswap V3 total TVL
  • 80+ projects have their liquidity managed via Arrakis vaults

Arrakis PALM - Protocol Automated Liquidity Management - is a service that consists of a suite of liquidity management strategies researched and developed by Arrakis Core strategists (Bene Gesserit). It aims to help projects bootstrap and maintain sustainable and deep liquidity.

By leveraging the concentrated liquidity nature of Uniswap V3 and the hyper flexibility made possible by Arrakis infrastructure, PALM is able to create market making experience that resembles Central Limit Order Book (CLOB), and help projects

  1. Bootstrap liquidity by acquiring more base asset inventory. For instance, Paladin can seed the liquidity with an initial composition of 95PAL/5agEUR. PALM’s bootstrapping strategies will progressively balance it towards 50/50. Paladin can now allocate more of its base assets to building the core products instead of liquidity provision.

  2. Execute market making strategies in a cost-effective, transparent and automated manner, to ensure deep and sustainable liquidity. After reaching a healthy liquidity composition, PALM will shift the focus to actively managing multiple concentrated ranges around the current price, to minimize slippage and sufficiently support ongoing trading activities.

Arrakis manages liquidity via Arrakis vaults, which tokenize liquidity positions originally represented as NFTs in Uniswap V3, hence making them fungible, composable, and able to be easily integrated into any protocol.

What is the Arrakis Finance Genesis House?
The Genesis House is the launch partner program Arrakis has set up for Arrakis PALM. A select group of projects can participate and be the first to use PALM.

There has been ongoing discussion between Arrakis and Paladin teams regarding how Arrakis can best support Paladin with its plan to expand liquidity to other DEXs. And both teams concluded that using the services from Arrakis by participating in the Genesis House would bring the most and best benefits to Paladin, which means that Paladin would deeper liquidity much quicker and cheaper, co-marketing via the Arrakis Genesis House would bring more eyes to Paladin, and on top of all that, we would take part in new novel technological experiments.

Additionally, in the case of Paladin, it could also mean a reduced size on the under-collateralized loan from Angle Protocol, hence less interest liability but still the same or even higher capital efficiency.

In terms of security, the contracts are internally audited, and there will be a whitelist for the smart contract- only the Paladin multisig address will be able to interact with it.

Background & Motivation
Currently, the liquidity situation for $PAL can be summarized as below:

As indicated from the table, even with an incentive spending of maximum 15k $PAL per week, there is still a significant slippage on $PAL for a $100k worth swap, which is a clear sign of weak liquidity depth.

It is also reasonable to assume that with the diminishing of the incentive over time, the slippage will most likely increase further due to the departure of the mercenary LPs, and majority of the incentive will be sold into the same pools.

Therefore, we as Arrakis propose to provide Paladin with the full spectrum of liquidity management services on Uniswap V3 with PALM, to create deep and sustainable liquidity for $PAL without the need of any liquidity incentives.

Specification
Depending on the liquidity situation of $PAL at the time of the service being initiated, in general, the liquidity management will be conducted in 3 phases:

Phase 1 - Accumulation of base asset
Paladin deposits roughly 850k $PAL that is currently sitting at UniV2 and 50k $agEUR into an Arrakis managed vault. The underlying strategy focuses on the accumulation of $agEUR so that the ratio of PAL/agEUR can be pulled towards 50/50

Phase 2 - Redefinition of liquidity ratio
Once there is sufficient $agEUR accumulated in the vault, Paladin can request to redefine the liquidity ratio of PAL/agEUR based on its own then-current market outlook, and Arrakis will adjust the underlying strategy accordingly to achieve and maintain the newly defined ratio. Paladin also has the option to dedicate such decision makings to a market maker, e.g. Arrakis.

Phase 3 - Growth & Expansion
More liquidity will be needed with the growth of both the trading volume and the demand for $PAL to be tradable on other DEXs or networks. Arrakis will help Paladin manage liquidity both vertically, i.e. maintain a deep and sustainable liquidity pool with more inventory from Paladin to accommodate the increasing trading demand, and horizontally, i.e. seamlessly manage liquidity in all avenues by automatic rebalancing and arbitrage among them, therefore unifying isolated markets and fragmented liquidity into an efficient cross-DEX and cross-chain liquid market.

For the services provided, Arrakis charges fees on two fronts:

  • Management fee: 1% of AUM
  • Performance fee: 50% of trading fees generated

Note that the performance fee is ONLY over the trading fees. All other revenues, e.g. $ANGLE rewards for the PAL/agEUR pool, shall be received by Paladin intact.

Reference
Website: https://www.arrakis.finance/
Twitter: https://twitter.com/ArrakisFinance

For

  • Arrakis will effectively become the liquidity management arm of Paladin and use its domain expertise to provide dedicated liquidity management solutions, while the core team can save the technical & operational overhead and focus its resources on building Paladin.
  • Only a limited amount of initial base asset inventory (or possibly zero if there is already an existing market on Uniswap V3) is needed with Arrakis’ liquidity management strategies.
  • Arrakis’ liquidity management solutions will significantly improve the current liquidity situation of $PAL, and at the same time eliminate the need of liquidity incentive, hence preserving the value of $PAL from constant selling pressure by mercenary LPs otherwise.
  • Arrakis will also assist and advise on any market making related decision makings, and the future growth & expansion of $PAL liquidity, to provide a full spectrum of liquidity management services.

Against
Paladin community is content with the current liquidity situation for PT, and willing to have Paladin rent / buy liquidity with $PAL incentives for a foreseeable future.

Discussion and temp check first.

6 Likes

Gm,

I just have one question

Therefore, we as Arrakis propose to provide Paladin with the full spectrum of liquidity management services on Uniswap V3 with PALM, to create deep and sustainable liquidity for $PAL without the need of any liquidity incentives.

I was wondering how to attract more liquidity providers without liquidity incentives with Arrakis? Would the fees and volume be sufficient?

3 Likes

Gm, thanks for this interesting proposal !

Can you explain more about PALM bootstrapping strategies to accumulate agEUR and balance the pool from a 95/5 to a 50/50 please ?

Is it just selling PAL progressively over time to reach 50/50 (in which case it would also bring selling pressure like mercenaries), or is there some kind of other mechanism like the pool is rebalanced every time someone buy PAL or something else ?

Also, how is the 1% fee on the liquidity taken ? Is it monthly/yearly or something else ?

2 Likes

Good question.

Majority of protocols are rich in their project tokens but lack base assets, e.g. $ETH, $USDC, etc. which are what protocols mainly look for from LPs, hence having to give away incentives for that.

One major value proposition of PALM is liquidity bootstrapping. A protocol itself can seed the initial liquidity with majority of it being its project token and the rest base asset. PALM will then progressively convert the project token into base asset via LPing on UniV3 by capturing the price bounces of the project token (the acquired based asset will be ejected out of the position for later deployment). You can look at it similarly to DCA, but through LPing. The strategy is market neutral, meaning that it acquires base assets regardless if it’s a bull, bear, or crab market for the token, as long as there is volatility.

The initial liquidity stated in the proposal will come from the existing PAL/agEUR pool that is currently sitting on UniV2 and seeded by Paladin Treasury. Based on the current price of $PAL, the liquidity value is somewhere around $300k with majority of it being $PAL, which is more than enough for PALM to be effective without the need of additional LPs, therefore no incentive needed.

Also as mentioned in the proposal, initially, the strategy will focus on converting $PAL to $agEUR at the local best prices (because the strategy only executes the conversion at $PAL price rallies). Once enough $agEUR has been accumulated, the strategy will then focus on creating deep and sustainable liquidity for $PAL at its current price.

3 Likes

You are quite on point actually :+1:

I think my response to the other comment answers your question as well.

Regarding the 1% fee, it’s taken at the end of each term (currently set at 1 year)

2 Likes

Hey, thanks for the detailed answer !

Not sure to understand how the strategy can be market neutral (working in bull/bear/crab) and capturing bounces at the same time ?
In theory, if there are only people selling, the strategy might not work right ?

How much agEUR do you consider enough ?

1 Like

Alright, some deeper elaboration should’ve been added previously. You’re right that if no buys at all, i.e. the price action is all the way linear trending down, then no strategy is able to acquire base assets since there are no base assets flowing in.

Fortunately, that’s usually never the case. Even if the overall price action is trending down, there are always buys alongside the trend, a la volatility. What PALM does is to capture those buys.

Assume a scenario where the volume goes like sell1-buy-sell2, i.e. a fraction of a typical down trending market where the overall sells outweigh the buys. What PALM does is that after each sell, it places a range order with more project tokens in addition to how much that was just sold into our range, and waits to capture the next buy. So,

  1. In a down trending market, in general, sell1+buy+sell2 should be negative
  2. If the net gain of sell1+buy is positive i.e. profit on base asset, then PALM ejects that gain before it gets swapped out by sell2, and sets it aside as reserve
  3. If the net gain of sell1+buy is negative, then we move on to sell2 with no ejection, and PALM will repeat the same ops to be ready for the next buy

As to how much $agEUR is enough, in the Genesis House program, for a brand new pool that has no existing liquidity, then at least 5% of the total initial liquidity has to be base asset, e.g. $agEUR. Of course, the more it is, the more effective PALM can be.

2 Likes

Thanks for the explanation, very clear :fire:

Yes to start the LP if I understood correctly, sorry my question was badly written I meant how much time do you estimate enough agEUR can be captured to reach a deep 50/50 LP ? Assuming the amount of agEUR needed is the same amount of PAL value in the current pool

Also I guess this program needs an important timeline to see progress, which is probably why you have a yearly fee.
However, in the case where the community is unhappy with this partnership after one year (I doubt it but just to be sure), does it require a proposal to renew the partnership each year and if not, how complicated would it be to stop it ?

2 Likes

Timewise, it depends on multiple variables, including both the externals that we don’t have control over, e.g. $PAL price outlook, trading volumes, external LPs, etc. and the internals that we can adjust, meaning the parameters that dictate the behavior of PALM. In our recent testing cases, it takes normally around 3 months, which can be used as a reference to measure against.

Since it’s both market condition and asset dependent, before we deploy a vault, we will go through all these with Paladin team, taking input and objectives from Paladin, and advising on the parameters based on the input and objectives. The parameters can be adjusted anytime should there be a turn of market outlook or change of objectives from Paladin.

Though the term is 1 year, as the liquidity owner, Paladin has the full autonomy over the liquidity in the vault at all times, meaning that you can take over the management or remove the liquidity anytime you want.

2 Likes

Thank you for this proposal. Full disclosure to the community, we have also discussed this internally with the Arrakis team as this move is part of a broader plan to move our PAL-agEUR liquidity from Uniswap v2 to Uniswap v3 under Arrakis. We are considering these moves for the following reasons:

  • We want to replicate our Curve and Balancer strategy on Angle, and to do this, we need to close down our loan with them;
  • Uniswap v3 is an infinitely complex AMM and we want to use our partnership with Arrakis to explore the opportunities in this ecosystem;
  • Using Arrakis will enable to progressively equilibrate back our LP position on Uniswap (currently 36% underwater).

I am confident this is the right path for us to consolidate and reduce risk.

4 Likes

Vote is now live: Snapshot

2 Likes